Our cannabis business attorneys see more and more deals where foreign individuals or companies want to invest in or acquire licensed cannabis businesses. It’s often easy for foreign companies to assume that because cannabis is state-lawful, it is similar to any other investment. This couldn’t be further from the truth. Even for local companies, the cannabis industry is much different from any other industry.
But for foreign companies, the cannabis industry is filled with pitfalls and potential liabilities. Many of these can be resolved if foreign investors understand and prepare for the issues ahead of time. Below, I walk through some of the more pertinent issues that our cannabis attorneys see in deals with foreign investors on a fairly regular basis.
#1 Residency Requirements
One of the biggest problems for foreign investors is states that have residency requirements. Washington State, for example, requires that all cannabis business owners be residents of the state. An investment into or acquisition of a Washington-based cannabis company that renders foreign citizens (or even out-of-state) owners may jeopardize the license.
#2 Differences in Laws Between Jurisdictions
Another potential problem for foreign investors is the difference in laws in the US and their home countries. State-lawful cannabis activity here may still be a crime in a foreign investor’s home country. Even if it’s not, there may be a host of different laws in a person’s home country that don’t square with US cannabis laws. For example, there are onerous ownership disclosure requirements (that I’ll get into below), which could include shareholders or members in foreign companies. Certain laws in a foreign resident’s home country might not allow or might just put roadblocks in the way of compliance with US state-lawful cannabis regulations. And good luck explaining to a regulator that the laws of a foreign country don’t allow compliance with cannabis laws here.
#3 Ownership Disclosure Rules
One of the most important things for foreign companies or person to consider before investing in or acquiring a US-based cannabis company is the concept of “ownership” (which we recently wrote about here). All states that regulate cannabis have ownership disclosure requirements that are often very onerous and invasive and, in some cases, require disclosure up through all parent companies to actual persons.
These disclosure requirements can be immensely difficult to comply with for foreign, and even some domestic, cannabis companies or investors. It’s not always clear who is an owner, and equity in a company is usually not the only trigger for ownership. For example, California cannabis regulators consider LLC managers, corporate directors or officers, and anyone else who exercises direction, management, or control in a licensed entity to be owners. At least one California cannabis agency considers companies or people who are entitled 20% of the profits of a licensee to be owners. Even more significantly, if an owner is a company, then certain persons who own or run that company may be considered owners. For at least one agency, owners are required to disclose many different kinds of equity holders, directors, officers, and managers, all the way up the corporate chain.
#4 Financial Interest Holder Requirements
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Like with owner disclosures, some states also require disclosures for certain classes of people who hold smaller equity interests in a cannabis company or who have less significant investment, loan, or profit-sharing relationships with those companies. In California, these people are called “financial interest holders”, and still have to disclose information to the state.
In California, financial interest holders are persons with less than 20 percent equity, as well as persons with loans to, investments in, or profit-sharing agreements of any kind in a cannabis company. There’s a number of exceptions, including that persons with less than 5 percent of the equity in a publicly traded company don’t need to be disclosed as financial interest holders. Just like with owners, if a financial interest holder is a company, it may need to disclose certain persons all the way up its corporate chain.
#5 Constant Reporting Obligations
State-lawful cannabis companies have constant reporting obligations throughout the life of their license. In California, almost any change (sometimes even seemingly insignificant changes) in the business needs to be reported to the applicable agencies within 10–14 calendar days. Other states are similar.
Monitoring reportable events is difficult for foreign companies. If they want to be fully compliant, they will need to either have US cannabis counsel or trust the licensee’s US-based counsel. Some things can be significantly challenging to report, like changes in financial interest holders. Take for example, a Canadian public company where shares may be constantly sold. Companies would need to constantly monitor transactions to ensure that new persons who acquire significant amounts of shares make disclosures within the tight timeframes set by the US state regulators.
Moreover, reporting is almost always the actual licensee’s obligation, meaning that an investor can’t actually communicate with agencies on the licensee’s behalf and will need to hope that the licensee actually makes disclosures after being provided with information from the investor. This can be frustrating for foreign companies who don’t actually have control over the licensee, so it is important to ensure in any kind of written agreement that the licensee meets its reporting obligations, and to spell out what happens if the licensee is penalized because it failed to make appropriate disclosures.
#6 Immigration Concerns
Being involved in the US cannabis industry can bar a person from entering the United States, obtaining a visa, or obtaining citizenship if they are here. We’ve written about cannabis immigration issues for foreign investors and owners in the past (see here, here, and here). It goes without saying that these are issues that must be considered in any deal. Failure to consider them before inking a deal could lead to disastrous effects and potential breaches that could have been avoided had the foreign investors consulted with US immigration counsel before inking the deal.
#7 Tax Issues
Cannabis is STILL illegal at the federal level in the United States. Internal Revenue Code Section 280E is a major roadblock for US-based cannabis companies and leads to extremely high taxes in most cases. Many foreign investors may not even be aware of some of the 280E issues, and there could be other problems in their home jurisdictions based on these high taxes.